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Establishing Credit

My friend and fellow cofounder of Crown Financial Ministries Larry Burkett used to say, "The first myth about credit is that you must have it. You don’t." Larry believed that you shouldn’t establish credit unless you have a specific purpose for it and know how to use it wisely.

Regrettably, in today’s world teenagers often are heavily indebted before they turn 20. Many teens get into trouble with credit because: (1) they’ve been told they need it and so they’re desperate to establish credit; (2) credit is being offered them even when they are without jobs; and (3) it’s easy for them to qualify for more credit than they can manage.

The first thing we recommend is to do without credit as long as you can. The less credit you have, the less credit you’ll be tempted to use. We also discourage the use of credit for any consumer items, such as entertainment, food, clothes or repairs. Those things usually become obsolete long before the debts are paid. Unfortunately, even fast-food chains have joined the long line of those who want us to purchase with plastic.

The safe way to establish credit initially is to borrow against an acceptable asset. For example, if a person has $1,000 in a savings account and wants to borrow the same amount, most banks will lend the account holder $1,000, using the savings as collateral. Usually, the lender charges from 1 to 2 percent more for the loan than the prevailing savings rate. So it would cost about 2 percent interest to establish a good credit history. For a one-year loan of $1,000, the net cost would be approximately $20.

In fact, as we know, it’s not even necessary to go through this process to get a credit card today. But even if a person does follow this suggestion, it neither implies that everyone should get a credit card or that having one means the person will be able to manage one properly. Nevertheless, the point is this: The discipline of saving should first be acquired -- otherwise that readily available credit can cause a whole lot of harm.

Because credit is accompanied by responsibilities and rights, people need to know what those responsibilities and rights are before they apply for credit. The Equal Credit Opportunity Act (ECOA) ensures that all consumers are given an equal chance to obtain credit. But before making application for a credit card, shop around and compare interest rates, annual fees and services of different credit card companies. Consider the finance charges, expected monthly payments and types of accounts or uses to which the card is limited. Check to be sure there will be no hidden charges that can be applied to the bill. It’s sensible to get a credit card that is widely accepted. However, before committing to any credit card company, read the credit application contract -- that means the entire contract -- and read it carefully.

Creditors are required to state the cost of borrowing in common language so that customers can figure out exactly what the charges for borrowing will be. Since credit costs vary, you need to remember two terms when comparing credit prices from different sources. Under the Truth in Lending law, the creditor must list in writing the finance charge and the annual percentage rate. The finance charge is the total dollar amount that has to be paid to the creditor to use the credit card. It includes interest costs and sometimes other costs, such as service charges and some credit related premiums or appraisal fees. The annual percentage rate (APR) is the percentage cost (or relative cost) of credit on a yearly basis. These are the two keys to comparing credit card cost, regardless of the amount of credit or the allowable payback time offered by the creditor.

Larry’s three principal rules regarding the use of credit cards were these:

• Never use a credit card to buy anything that isn’t budgeted.

• Pay the entire credit card bill each month.

• The first month the entire credit card bill cannot be paid, destroy the cards.

The difficulty encountered when people attempt to reestablish credit reinforces an important truth taught in Proverbs 22:1: "A good name is to be chosen over great wealth; favor is better than silver and gold."

It takes a long time to build a good reputation but very little time to destroy it. Although God is faithful to forgive, this doesn’t mean that the consequences of violating His principles of finance can be avoided. There is no quick fix to damaged credit. The best way to reestablish credit is through the disciplined use over a long period of time of whatever credit is remaining. In addition, if all past debts have been repaid, then each creditor should be personally contacted and asked to review the credit rating they have given to the credit bureaus.

Another helpful option in reestablishing credit is to obtain a secured credit card. A secured card is a bank credit card that is established by depositing money in a bank account. The account serves as security for the card; if the bill isn’t paid, the money in the account may be used to cover that debt.

Again, remember that the "first myth about credit is that you must have it, because you don’t." Use credit only for specific purposes for which you have budgeted and planned. And know how to use credit wisely. Lenders may promote the idea that a person should establish credit at an early age. But, in fact, the earlier you learn and put into practice biblical financial principles, the better off you’ll be. And the longer you can go without credit the chances are less that you’ll have to depend on it later.

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Howard Dayton is CEO of Crown Financial Ministries. Dayton and the late Larry Burkett joined forces in 2000 when Crown Ministries, led by Dayton, merged with Christian Financial Concepts, led by Burkett. The new organization became Crown Financial Ministries, on the web at www.crown.org.